Stock Analysis

Companies Like Gulf Island Fabrication (NASDAQ:GIFI) Are In A Position To Invest In Growth

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NasdaqGS:GIFI
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Gulf Island Fabrication (NASDAQ:GIFI) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Gulf Island Fabrication

When Might Gulf Island Fabrication Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Gulf Island Fabrication last reported its balance sheet in September 2019, it had zero debt and cash worth US$71m. In the last year, its cash burn was US$12m. Therefore, from September 2019 it had 6.2 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

NasdaqGS:GIFI Historical Debt, January 15th 2020
NasdaqGS:GIFI Historical Debt, January 15th 2020

How Well Is Gulf Island Fabrication Growing?

Gulf Island Fabrication managed to reduce its cash burn by 63% over the last twelve months, which suggests it's on the right flight path. Pleasingly, this was achieved with the help of a 43% boost to revenue. Considering these factors, we're fairly impressed by its growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how Gulf Island Fabrication is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Gulf Island Fabrication Raise Cash?

We are certainly impressed with the progress Gulf Island Fabrication has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of US$80m, Gulf Island Fabrication's US$12m in cash burn equates to about 14% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Gulf Island Fabrication's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Gulf Island Fabrication is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn relative to its market cap wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that Gulf Island Fabrication insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course Gulf Island Fabrication may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.